UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 39485 / December 23, 1997 Accounting and Auditing Enforcement Release No. 999 / December 23, 1997 Administrative Proceeding File No. 3-9516 : ORDER INSTITUTING PROCEEDINGS In the Matter of : PURSUANT TO SECTION 21C OF THE : SECURITIES EXCHANGE ACT OF 1934 JAMES A. TERRANO : AND RULE 102(e) OF THE COMMISSION'S LYNN R. MICHL, CPA, : RULES OF PRACTICE, MAKING FINDINGS : AND IMPOSING CEASE-AND-DESIST Respondents. : ORDERS AND SANCTIONS : I. The Securities and Exchange Commission ("Commission") deems it appropriate that public proceedings be, and they hereby are, instituted against James A. Terrano ("James Terrano") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Lynn R. Michl ("Michl") pursuant to Section 21C of the Exchange Act and Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice. <(1)> In anticipation of these proceedings, James Terrano and Michl have each submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the <(1)> Rule 102(e), 17 C.F.R.  201.102(e), provides in pertinent part that: The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter:...(ii) [t]o be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. Commission is a party, and without admitting or denying the Commission's findings herein, except that James Terrano admits the findings contained in paragraphs II. A. and B. below and Michl admits those in paragraphs II. A. and C. below and both admit the Commission's jurisdiction over them and the subject matter of these proceedings, James Terrano and Michl consent to the entry of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings and Imposing Cease-and-Desist Orders and Sanctions ("Order"). II. On the basis of this Order and the Offers submitted by James Terrano and Michl, the Commission finds that: <(2)> A. Terrano Corporation ("Terrano"), now known as Dynamic Healthcare Technologies, Inc., was at all relevant times a Nebraska corporation that developed, marketed and supported computer information systems for the medical industry. At all relevant times Terrano's securities were registered under Section 12(g) of the Exchange Act and Terrano made periodic filings under Section 13(a) of the Exchange Act. Terrano's fiscal year ended on December 31. B. James Terrano, of Lincoln, Nebraska, was Terrano's president and chief executive officer until July 6, 1994. C. Michl, now of Waverly, Iowa, was Terrano's chief financial officer from 1990 until September 1994. At all relevant times through the present he has had an inactive certified public accountant license in Nebraska. D. For several years through 1994, Terrano's primary product was a computer system known as the ILS-5. The ILS-5 included a computer, core software, and software enhancement modules that could be purchased with the core software to perform additional functions. E. During 1992, 1993 and the first half of 1994, Terrano improperly recorded, as software revenue and accounts receivable, sales of four software enhancement modules that were not yet available for use on certain computer hardware. F. James Terrano and Michl attended senior management meetings where software development, software delivery and software revenue recognition were routinely discussed, and knew or should have known from these meetings that the four software enhancement modules were not yet available. A spreadsheet showing, among other things, product sales to date and projected sales on a quarterly basis for the fiscal <(2)> The findings herein are made pursuant to James Terrano's and Michl's Offers and are not binding on any other person or entity named as a respondent in this or any other proceeding. ======END OF PAGE 2====== year was often distributed for discussion and updating at these meetings. The spreadsheet was updated based on decisions made at the meetings, as well as other information, without proper documentation to verify delivery. James Terrano participated in the decision-making process, and agreed with or acquiesced in such decisions. Michl and his staff then used the updated spreadsheet, which included purported sales of the four software modules, to make entries into Terrano's accounting system. Accordingly, James Terrano and Michl knew or should have known that Terrano recorded revenue and accounts receivable on the sales described in paragraph II. E. above though the software being sold was not yet available. G. In the course of the audits of Terrano's financial statements for fiscal 1992 and 1993, Michl provided Terrano's independent auditors with management representation documents which falsely stated that the software enhancement modules described in paragraph II. E. above were available for delivery. H. Also during fiscal 1992, 1993 and the first half of 1994, Terrano improperly recorded, as software revenue and accounts receivable, sales of software that was available for delivery, but which had not been delivered at the time the revenue and accounts receivable were recorded. Some of this software was eventually delivered in a fiscal period subsequent to that in which the sale was recorded. Some was never delivered. For the reasons set forth in paragraph II. F. above, James Terrano and Michl knew or should have known that revenue and accounts receivable on these sales had been improperly recorded. I. As a consequence of the above-described improperly recorded revenue, Terrano filed with the Commission annual reports on Form 10-K for fiscal 1992 and 1993, and quarterly reports on Form 10-Q for all three quarters of fiscal 1992 and 1993 and the first and second quarters of fiscal 1994, which James Terrano and Michl knew or should have known contained materially misstated financial statements. For example, due to the above-described improper revenue recognition, Terrano's fiscal 1992 financial statements overstated software licensing revenue by 11% and understated net loss by 19%, and its fiscal 1993 financial statements overstated net income by 49%. J. In January 1995, Terrano filed an amended annual report on Form 10-K for fiscal 1993, which also restated the company's fiscal 1992 figures in a comparative presentation. Terrano also filed amended quarterly reports on Form 10-Q for fiscal 1994, with the company's 1993 quarterly figures restated in comparative presentation. <(3)> K. During the period from about January 1992 through about August 1994, <(3)> Terrano's restated figures differ from the percentages set forth in paragraph II. I. above because the restatement also rectified accounting errors not charged in this proceeding. ======END OF PAGE 3====== James Terrano violated, and Michl willfully violated, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that they, directly or indirectly, in connection with the purchase or sale of the securities of Terrano, and by use of the means and instrumentalities of interstate commerce and the mails, employed devices, schemes or artifices to defraud, made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and engaged in transactions, practices or courses of business which would and did operate as a fraud or deceit upon purchasers of the securities of Terrano. As part of and in furtherance of this violative conduct, James Terrano and Michl made untrue statements of material fact and omitted to state material facts in Terrano's annual reports on Form 10-K for fiscal 1992 and 1993 and quarterly reports on Form 10-Q for each quarter of fiscal 1992 and 1993 and the first two quarters of fiscal 1994 concerning Terrano's software revenue, net income or loss, and accounts receivable. L. During the period from about January 1992 through about August 1994, James Terrano violated Section 13(b)(5) of the Exchange Act by knowingly circumventing or knowingly failing to implement a system of internal accounting controls in that he, directly or indirectly, disregarded established revenue documentation procedures, which caused false entries to be made in Terrano's accounting records concerning Terrano's software revenue, net income or loss, and accounts receivable. M. During the period from about January 1992 through about August 1994, Michl willfully violated Section 13(b)(5) of the Exchange Act by knowingly circumventing or knowingly failing to implement a system of internal accounting controls, and knowingly falsifying Terrano's books, records or accounts, in that he, directly or indirectly, disregarded established revenue documentation procedures, which caused false entries to be made in Terrano's accounting records concerning Terrano's software revenue, net income or loss, and accounts receivable. N. During the period from about January 1992 through about August 1994, James Terrano and Michl, due to an act or omission which they knew or should have known would contribute to the violation, caused Terrano to violate Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 by filing the false and misleading periodic reports listed in paragraph II. K. above. O. During the period from about January 1992 through about August 1994, James Terrano and Michl, due to an act or omission which they knew or should have known would contribute to the violation, caused Terrano to violate Sections 13(b)(2)(A) and (B) of the Exchange Act by failing to keep books, records and accounts, which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of its assets, and by failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that ======END OF PAGE 4====== transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles. P. During the period from about January 1992 through about August 1994, James Terrano violated, and Michl willfully violated, Rule 13b2-1 under the Exchange Act by, directly or indirectly, causing books, records or accounts of Terrano to be falsified. Q. In or about March 1993 and March 1994, Michl willfully violated Rule 13b2-2 under the Exchange Act by making materially false and misleading statements to Terrano's independent auditor in connection with its audits of Terrano's financial statements for fiscal 1992 and 1993. R. Based on the foregoing, Michl engaged in improper professional conduct and willfully violated provisions of the Federal securities laws and the rules thereunder within the meaning of Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice. III. In view of the foregoing, the Commission deems it appropriate to accept the Offers submitted by James Terrano and Michl and impose the cease and desist orders and sanctions agreed to therein. Accordingly, IT IS HEREBY ORDERED that: A. James Terrano cease and desist from committing or causing any violation, or any future violation, of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing any violation, or any future violation, of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 of the Exchange Act. B. Michl cease and desist from committing or causing any violation, or any future violation, of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from causing any violation, or any future violation, of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 of the Exchange Act. C. Michl be denied the privilege of appearing or practicing before the Commission as an accountant. D. Five (5) years from the date of this order, Michl may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as: 1. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission, upon submission of an ======END OF PAGE 5====== application satisfactory to the Commission in which Michl undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; 2. an independent accountant, upon submission of an application containing a showing satisfactory to the Commission that: a. Michl, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") as long as he appears or practices before the Commission as an independent accountant; b. Respondent Michl or the firm has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and c. Michl will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant. E. The Commission's review of any request or application by Michl to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Michl's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. By the Commission Jonathan G. Katz Secretary ======END OF PAGE 6======